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Credit Growth Hits Four-Year High

Credit growth in India's banking system rose to around 20 per cent year-on-year in the June 2026 quarter, the highest in more than four years, while deposit growth continued to lag, keeping the loan-to-deposit ratio (LDR) near decade-high levels, according to a Bernstein report.

The report said credit growth remained strong in July, with the recovery spread across sectors and led by industrial and services lending. Large corporate borrowings and higher funding demand from non-banking financial companies (NBFCs) were among the key drivers.

Drivers of Credit Expansion

"Growth momentum improved meaningfully during the quarter, with system credit growth accelerating to ~20% YoY (or ~18% adjusted for reporting changes), while deposit growth continued to lag," Bernstein said. However, the report noted that changes in fortnightly reporting requirements introduced in December 2025 have contributed to the reported increase. Based on bank disclosures, Bernstein estimates the underlying credit growth at around 18 per cent.

Industrial credit growth was supported by a sharp rise in borrowing by large companies, which account for nearly 70 per cent of industrial loans. Credit growth to micro, small and medium enterprises (MSMEs) also remained strong. Services lending also gained momentum, with bank credit to NBFCs growing by more than 30 per cent in recent months. Bernstein said higher bond-market rates had encouraged NBFCs to rely more on bank loans for funding. "The recent improvement in system credit growth has been broad-based across segments, although the sharpest acceleration has been visible in industrial and services lending," the report said.

Funding Concerns and Profitability Outlook

The strong growth in loans, however, has outpaced deposit mobilisation, raising concerns over funding for banks. Although deposit growth has improved in recent months, it remains below credit growth, keeping the system-wide LDR close to decade-high levels.

Stable Margins and Healthy Asset Quality

Despite the high LDR, bank margins remained broadly stable, Bernstein said. Fresh lending and term-deposit rates have largely stabilised, while lower certificate of deposit rates and issuances have eased some pressure on funding costs. "The spread between fresh loan yields and TD rates remains higher than the spread embedded in the outstanding loan and deposit portfolios, indicating that incremental loan growth remains margin-accretive," the report said.

The report also pointed to healthy asset quality and improving credit costs, which have helped keep banking-sector profitability near decade-high levels. Bernstein expects the banking sector to maintain healthy growth in FY27, supported by favourable liquidity conditions and improving nominal credit growth. However, it cautioned that possible policy tightening later in the year could slow the pace of expansion. The brokerage retained its FY27 loan-growth estimate at around 13-15 per cent and expects net interest margins to remain broadly stable, with asset quality staying benign. (ANI)